Market structure and performance in European banking

It is a peculiar feature of European banking markets that, in almost every country, a handful of large banks tend to emerge over time, whether through government encouragement, or the workings of the market mechanism. From a general perpec-tive, however, it is difficult to evaluate the competitive implications of increased concentration. The traditional structure-conduct-performance (SCP) paradigm would suggest that increased concentration fosters collusion and anti-competitive practices whereas the efficiency hypothesis suggests otherwise. This paper presents tests of the two hypotheses with respect to the European banking industry using pooled and annual date for the period 1986 to 1989. The results generally support the traditional SCP paradigm as an explanation for the market behaviour of European banks.